Optimism Around Equity: Q&A With GW&K Investment Management’s Bill Sterling


Global Finance: What’s the outlook for the global economy?

Bill Sterling: This year, many global equity markets are at or near record highs on expectations of a global economic soft landing. Sluggish growth is forecast for 2024 to reflect the impact of higher interest rates put in place over the past two years. However, there is a great deal of optimism that higher rates have done what they were supposed to and brought inflation down, which will allow central banks to pivot toward cutting rates later this year. Equity markets are riding that wave of optimism that lower rates will fuel growth over the next few years.

GF: Does the optimism extend to all major markets?

Sterling: There are differences in every region. In Latin America, for example, central banks began raising interest rates before the Federal Reserve and many are now already in easing mode. Last year, average equity returns in Latin American markets were 34%—well ahead of the US, Japan and Europe. Japan, on the other hand, recently exited its negative interest rate policy for the first time in eight years, and Japanese stocks finally rose above their 1989 peak for the first time.

In the US, investors were expecting a recession in the second half of last year and instead saw 4% growth and declining inflation. In Europe, the economic data is considerably weaker than in the US, but inflation has come down there, too. As in the US, markets are looking for the European Central Bank to pivot to rate-cutting later this year. A common thread is that all regions are still living with the aftershocks of the pandemic.

GF: Is China the outlier in the global economy?

Sterling: The big issue with China is still the property market. The country is seen as dramatically overinvested in the housing sector, and without a recovery in housing, it’s hard to get an overall recovery. Investment in property declined 9% in the first two months of this year after double-digit declines last year. The recent 10-year bond yield of 2.28% is below the lowest level we saw during the pandemic, and stock prices are 55% below their most recent high in 2021. The Chinese equity market looks cheap by many metrics, but the geopolitical issue is still hanging out there. The nightmare scenario of China invading Taiwan is something no one wants to think about. China may not be out of the woods yet, despite cheery announcements from the government. 

GF: What’s ahead for M&A and corporate finance this year?

Sterling: Buoyant markets usually result in buoyant M&A activity. If the Fed holds interest rates higher for longer, it could disappoint markets, but if they cut rates more aggressively, there will certainly be interest in refinancing. Investors, however, are finally getting compensated more for risk-free investments. The 4.3% yield on the 10-year US Treasury bond is a nice return if the Fed gets inflation down to its target 2%. One concern is that with spreads so tight in the corporate bond market, accommodative monetary policy may be good for stocks but less so for corporate bonds.

GF: How has AI impacted financial market valuations?

Sterling: The enthusiasm for AI has been a driver of equity markets—particularly in the US. Some strategists are talking about the new Roaring ’20s, based on AI delivering much higher productivity growth in the economy. In that context, price/earnings ratios in the US may be so high because they’re discounting more favorable long-term growth scenarios.

GF: How do geopolitical risks factor into your forecasting?

Sterling: In recent decades, how markets react to such shocks has largely been about what they mean for oil prices. Often markets have counterintuitive responses to big geopolitical shocks, which suggests to me that, as an investment strategist, you need to be humble when considering what these shocks may mean for financial markets.



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